CERTAIN CONTRACTS MADE BY WAR DEPARTMENT 



lUC 263 
.flS 
1918 
[Copy 1 



HEARINGS 



BEFORE 



THE „COMMITTEE ON RULES 

HOUSE OF EEPEESENTATIVES 

SIXTY-FIFTH CONGRESS 
THIRD SESSION 



ON 



H. RES. 484 



DECEMBER 28, 1918 




WASHINGTON 

GOVERNMENT PRINTING OFFJCR 

1918 






». •t ^• 

JUN 6 1919 



^•• 



CERTAIN CONTRACTS MADE BY WAR DEPARTMENT. 



Committee on Rules, 
House of Representatives, 
Satmxlay, Decemher 28^ 1918. 
The committee met at 10.30 o'clock a m., Hon. Edward W. Poii 
(chairman) presiding. 

STATEMENTS OF HON. NEWTON D. BAKER, SECRETAEY OF WAR; 
MR. BENEDICT CROWELL. ASSISTANT SECRETARY OF WAR; 
MR. EDWARD R. STETTINIUS, DIRECTOR OF MUNITIONS; MR. 
GOLDTHWAITE H. DORR, ASSISTANT DIRECTOR OF MUNITIONS ; 
AND LIEUT. COL. F. W. N. CUTCHEON. 

The Chairman. Mr. Secretary, we have before us H. R. 13274, and 
as there seems to be a desire for some exphination, we will be obliged 
to you for any comments you may care to make. 

Secretary Baker. Thank you, Mr. Chairman, very much. As I 
understand this hearing, it is to determine whether the exigencies 
are such as to give this measure priority of consideration by a rule 
of the committee. At the time the armistice intervened the War 
Department was, of course, busy both on this side of the ocean and 
the other in accumulating supplies of all kinds in anticipation of 
the continuance of the war. 

The number of contracts outstanding was very great, and in addi- 
tion to those which had been formally executed there were very 
large numbers of contracts in process of execution, some of them 
more or less formalized and some of them quite informal, all of 
them in the process of making. Those contracts consisted of things 
like this, verbal or letter orders to manufacturers or merchants or 
producers that they should produce and supply to the department 
certain types of equipment or supplies. 

The practice of the department, in order to expedite production 
and to cut red tape as far as possible, was to call the manufacturer in, 
agree with him on what he was to do, and tell him to go ahead and 
start, and after he had gone to work, the formal contract w^ould be 
i-educed to writing, signed by the Government, and sent to him for 
execution ; and sometimes his work had gone a considerable distance 
before the actual written contract was tendered to him for signature. 
This is true in Europe just as it is here. Gen. Pershing's supply 
officers would work out an arrangement with a manufacturer that 
he should produce certain things, and tell him to go ahead and start 
doing it, and in order not to lose time, they w^oulcl start him off before 
the actual written contract was made, and then the written contract 
would follow. 

3 



4 CERTAIN CONTEACTS MADE BY WAE DEPAETMENT. 

When the armistice intervened the Comptroller of the Treasury 
held that it was no longer possible for the War Department to make 
formal and proper contracts for war supplies, on the theory that we 
no longer needed them, and we could not make contracts for things 
which we did not need. Therefore some form of legislation is neces- 
sary to make formal these informal agreements and enable the Gov- 
ernment to do equity by persons who, relying upon it, have either 
increased their facilities or produced ncAv facilities or partially per- 
formed some informal contracts, made some deliveries, or gotten 
ready to make delivery ; in other words, put themselves in a state of 
disadvantage and loss, relying upon the Government's order and their 
own expeditious attempt to comply with the Government's order and 
supply the things needed. 

In this countr}^ the number of these informal orders is very large, 
and they are very varying in character. You are not interested, I 
fancy, in the details of the legislation and whether or not it is ade- 
quate to meet the need or not, but these cases are very serious in char- 
acter. Sometimes, for instance, a contracting officer of the Govern- 
ment will have authorized a written contract to be made, and it will 
be found to have been signed by one of his subordinates, because the 
particular contracting officer was away, and it was intended at some 
future time to add his formal signature to it, but it was signed b}^ his 
authority by a subordinate. The comptroller rules those to be in- 
formal contracts, and that it is no longer possible for the proper 
authorized officer to add his signature so as to make the contract 
enforceable and formal. Sometimes there is no written evidence of 
the contract bej^ond letters or telegrams or memoranda of conversa- 
tions. 

This legislation, therefore, is for the purpose of enabling the Gov- 
ernment justly and economically to recognize all of the obligations 
which have been created in this strenuous and hurried period of rapid 
accumulation of supplies. 

The importance of the legislation is very great from two points 
of view. In the first place, of course, it is essential that the Govern- 
ment should pay its just obligations, whatever they are; and in the 
second place, it is important that it should do it speedily. Nothing 
is more necessar}^ to the interests of the whole country than that all 
of these persons who are creditors of the Government should be able 
to quickly liquidate their claims and get their money so they can 
embark on peace-time industry and employ labor and set the business 
of the country going again. 

Mr. Stettinius is here. He has been in Europe for many months 
as a special representative of the War Department about business 
matters and has been doing, if I may say so in his presence, a service 
of incalculable value to the Government. He was talking to me 
yesterda}' and to-day about the importance of this legislation abroad. 
There are very large numbers of cases over there where the only 
alternative the Government has is to allow contractors to go on and 
finish things which we do not need or to order an immediate discon- 
tinuance and liquidate our obligation by a comparatively small pay- 
ment. If this legislation is at once passed, it is thought that for a 
relatively small sum the American Expeditionary Force in France 
will be able to cancel its obligations and prevent the accumulation 



CERTAIN COISTTEACTS MADE BY WAR DEPARTMENT. 5 

of vast qviantities of things that are no longer needed for the Govern- 
ment, while if this legislation be not passed our written obligations 
are such that manufacturers and producers will have to go on and 
produce very vast quantities of unneeded supplies. So that the 
economy of the Government, as well as the good faith of the Govern- 
ment', requires urgently that this legislation shall be passed and the 
department put in possession of power to adjust all of these equitable 
claims, pay off as rapidly as we can, and pay as little as we can, 
contracts, formal and informal, which would, if left alone and not 
adjusted in this fashion, lead to the production and accumulation of 
very great additions to our present volume of supplies, which is so 
great that we can hardly find storage for them. 

Mr. Campbell. Mr. Secretary, may I ask you a question? 

Secretary Baker. Certainly. 

Mr. Campbell. Are the persons contracted with producing now 
under these informal contracts in Europe and here ? 

Secretary Baker. I can not answer for Europe. I should suppose 
they are to some extent. Here I can not give a comprehensive answer. 
Most of them have discontinued. In most cases in this country it will 
be simply a question of adjusting the claim. 

Mr. Campbell. You mentioned Mr. Stettinius having made the 
statement that there were contracts there which could be terminated 
and settled for less by stopping pi'oduction and avoiding the accumu- 
lation of a larger amount of material than really » was necessary? 

Secretary Baker. I was thinking more particularly of executed 
contracts in those cases than these informal contracts. 

Mr. Campbell. This bill has nothing to do with the formally exe- 
cuted contracts. 

Secretary Baker. This bill gives the Secretary of War power, as 
I remember, to substitute a new contract for an old contract, a new 
contract which will diminish the quantity to be delivered or to cancel 
an old contract and make a payment merely covering the expenditures 
already made on the faith of the outstanding contracts. Mr. Stet- 
tinius is here, however, and he is very much fuller of it than I am. 

Mr. Campbell. Have you some idea of the extent of the contracts 
in this country under which the Government has some obligation ? 

Mr. Crowell. There are 6,669 contracts, aggregating $1,675,951,000 
that we know of right now. 

Mr. Campbell. They are informal contracts? 

Secretary Baker. Informal for one or the other of the reasons I 
have described, either not signed by the proper contracting officer or 
signed only by the Government and not signed by the contractor at 
the end as the technical requirement of the statute is, or that they 
received a verbal order or a telegraph order or a letter order as dis- 
tinguished from 

]Mr. Campbell (interposing). How did the minds of the contract- 
ing parties get together on these matters that are informal and under 
which production has been commenced? 

Secretary Baker. Ordinarily they would be called to Washington, 
sit doAvn with the contracting officer, agree on the terms for the pro- 
duction of the stipulated thing, make a comprehensive but informal 
minute of it, and then the contracting officer would say, "All right; 
now go ahead and start." 



6 CERTAIN CONTRACTS MADE BY WAR DEPARTMENT. 

Mr. Campbell. Without any further memorandum or without any 
memorandum at all? 

Secretary Baker. There woult be a memorandum, of course, and it 
would all appear there. * 

Mr. Campbell. But nothing signed ? 

Secretary Baker. Ordinarily not signed by both parties or if not 
signed by either it Avas immediately reported as a purhase order. 

Mr. Campbell. Are there memorandums in the department now 
that would enable the department to effect an adjustment Avith these 
contractors ? 

Secretary Baker. Oh. yes. Every order of that kind, however in- 
formal it is, is the subject of record in the department. 

Mr. Campbell. You spoke of orders by telephone ? 

Secretary Baker. Yes. 

Mr. Campbell. That Avas an order after the minds of the parties 
had come together? 

Secretary Baker. Yes; unless it Avas for some standard article. I 
instanced the telephone, perhaps hastily. ITnless it Avas some stand- 
ard article, it Avould not be ordered by telephone, of course; but 
there are complete records in the department shoAving every out- 
standing order and obligation. 

Mr. Campbell. Do you anticipate trouble or difficulty in arriving 
at an adjustment Avith these parties? 

Secretary Baker. Xo; avc have had very little difficulty — amaz- 
ingly little. 

Mr. Campbell. Is there a disposition on the part of contractors 
AAath the Government to boost the A^alue of their product or the A^alue 
of the improvements thev have made in their plant for the benefit 
of the Government ? 

Secretary Baker. None of that is possible. 

Mr. Campbell. In what Avay can you hold a rein over that? 

Secretary Baker. That is all agreed to beforehand. Every better- 
ment to a plant is agreed to and the method of determining the A'alue 
of it Avhen the contract comes to be settled is a part of the contract. 

Mr. Campbell. And that is in the formal contract? 

Secretary Baker. And the informal ones, as well. Nobody has 
eA'er been carte blanche to do as he pleases in his factory and settle 
afterAvards. We haA'e always agreed beforehand just hoAv the better- 
ments are to be accounted for. 

Mr. Campbell. What I Avas trying to get at is Avhat way you have 
of arriving at a definite conclusion Avitli the party that made this 
contract verbally and informally. He may be dead and the party 
Avho spoke for the department may not be connected with the de]3art- 
ment. What Avay AA'ill the GoA^ernment have of arriving at a conclu- 
sion Avith the firm? 

Secretary Baker. It is unwise for me to answer that question, be- 
cause I haA'e not the detailed knowledge that Mr. Dorr has; but it 
is perfectly clear that as to each contract there are data and memo- 
randa and records of the contract of so complete a character that 
there can be no dispute about those items. Thej^ simply have not 
gotten themseh'es written into the kind of formal contract which 
the statute requires. 

Mr. Campbell. So there is some memorandum — ^ — 



CERTAIN CONTRACTS MADE BY WAR DEPARTMENT. 7 

Secretary Baker (interposing). Oh, complete. 

Mr. Campbell (continuing). Upon which tlie Government can 
I^rotect itself? 

Secretary Baker. Complete memoranda. I am right about that, 
am I not, Mr. CroAvell? 

Mr. Ckowell. Yes, sir. 

The Chairman. Mr. Secretary, I would like to invite a little ex- 
planation which might be brought out by the question as to why the 
intervening of the armistice makes this legislation necessary. If the 
armistice had not been agreed to, all these contracts would have been 
binding, as I understand it. 

Secretary Baker. Yes. 

The Chairman. Somebody had authorit}^ to act in the premises 
until the armistice intervened ? 

Secretary Baker. Yes. 

The Chairman. Now, I would like for my own enlightenment to 
have you give us your views as to just why the intervening of the 
armistice makes this legislation necessary. 

Secretary Baker. I can only give the comptroller's views. The 
comptroller says that the moneys which have been appropriated 
to buy things which are needed for the war can not be obligated and 
pledged by the department for things wdiich obviously will not be 
needed for the war. If, for instance, the Congress appropriated 
mone}' to buy 10,000 motor trucks for the war and Ave had made an 
informal agreement for the 10,000 motor trucks and then the war 
came to an end, the comptroller holds w-e can not now^ make a formal 
agreement Avitli that contractor, by w^ay of compromise and adjust- 
ment, to receive from him 1,000 motor trucks, because they are no 
longer needed for the war. 

Mr. Snell. Technically, are we not still in war? 

Secretary Baker. I think so. I have had no opportunity to discuss 
the matter with the comptroller. 

Mr. Snell. If, technically, we are still in war, I do not see why the 
regular rules and procedure would not apply. 

Secretary Baker. Well, I confess I agree with you entirely, Init we 
are asking the legislation to help us with the comptroller. 

Mr. Harrison. That question is now up in this case about the tak- 
ing over of the cables. I noticed yesterday they were discussing that 
one point. 

Secretary Baker. Of course, it is theoretically possible for either 
party to the outstanding armistice to denounce it on 30 days' notice 
and the war w^oulcl be on again. 

Mr. Campbell. Was there any stipulation in your formal contract 
that terminated the contracts on the cessation of hostilities? 

Secretary Baker. All of the later contracts made within the last 
period of a good many months provide for termination at the will 
of the Government, as I recall it. 

The Chairman. At the will of the Government; but it did not 
mention the cessation of hostilities or the end of the war ? 

Secretary Baker. No; it did not mention the cessation of hos- 
tilities. 

Mr. Harrison. Is this bill unanimously reported from the Com- 
mittee on Military Affairs? 



S CERTAIN CONTRACTS MADE BY WAR DEPARTMENT. 

Mr. Dent. Yes. I can answer that question, Mr. Chairman. 

The Chairman. In any event, the only purpose of this legislation 
is to enable the department to save the Government an enormous 
expenditure. It should only have that effect. 

Secretary Baker. To save the Government an enormous expendi- 
ture, but incidentally and in addition to that it does do the other 
thing; that is, it enables the Government to pay its good-faith obli- 
gations and restore to persons who have embarked on expensive 
processes at the invitation of the Government and to help in the 
war — it saves them the delay and the long litigation in the Court 
of Claims and enables them to get back to normal industry speedily. 

Mr. Snell. Mr. Secretary, did I understand you to say that this 
legislation was of more importance in connection with the foreign 
orders ? 

Secretary Baker. Not of more importance. I think it is of equal 
importance on both sides. Mr. Stettinius is very clear as to its very 
urgent importance abroad, and Gen. Pershing has cabled us to that 
.effect. 

Mr. Harrison. Mr. Secretary, it may be outside of the scope of 
this bill, but has j^^our department any authority now to dispose of 
this great amount of things which you have amassed since the war 
^ibegan ? 

Secretary Baker. Yes; we have authority to dispose of everything 
not needed for military purposes. 

Mr. Harrison. That does not require new legislation ? 

Secretary Baker. No, sir. Mr. Stettinius illustrated to me this 
morning this kind of case. I really am depriving you of a pleasure 
when I am telling you what he would say to 3^ou better ; but he illus- 
trated to me the case of materials which have been ordered in neutral 
countries like Spain and Switzerland, where we have no opportunity, 
of course, to appeal to any sort of patriotic motive on the part of the 
contractor. They simply have a contract and we have to make a 
Imsiness adjustment with them. Now, it is very necessary for us to 
do that speedily. The longer that hangs on the the more the inter- 
est money grows and everything else involved in it. 

Mr. Garrett. Mr. Secretary, did the contract made abroad contain 
the same provision you mentioned with reference to stopping at the 
will of the Government? 

Secretary Baker. No; they were firm contracts. Mr. Stettinius, 
i^or instance, went to England and negotiated there some artillery 
^/urchases. So far as I know those had not been reduced to formal 
contracts, in some instances. 

Mr. Stettinius. They had not, but the verbal negotiations were 
conducted with a very distinct understanding that we would agree 
upon provisions giving the United States Government the right of 
cancellation. So that Ave have had no difficulty at all in regard to 
those negotiations. If I may say a word here 

Secretary Baker. I would be glad if you would. 

Mr. Stettinius. I would say that 90 per cent of our purchases in 
England have been made from or through the British Government, 
the British Ministry of Munitions, or the British War Office, on what 
sire termed informal purchase orders; that is. purchase orders signed 
hj the purchasing agent but not accepted by the British Government ; 



CERTAIN CONTEACTS MADE BY WAR DEPARTMENT. 9 

in other words, there are, in very few instances, formal contracts. 
The British Government has proposed that in effecting settlements 
they will do for us as they do for themselves. They recognize, for 
instance, the equitable right of a contractor to claim profits, and 
tb^y will negotiate or they will trade and in some instances they 
will concede profit and in other instances they will not. If the con- 
tractor had a very large and profitable business he would be merely 
reimbursed as to his actual outlay. If, on the other hand, the situa- 
tion is one Avhere special arrangements have been made and a con- 
siderable amount of time and money spent in preparing for manu- 
facture and nothing delivered they may allow some profit. It is a 
case of trade in each instance and we, of course, should be in posi- 
tion where we will fully indemnify and protect the British Govern- 
ment in respect to any arrangements it may make for us of the same 
character as it may make for itself. 

Mr. Campbell. We are to settle with the British contractors 
thi'ough the British Government. 

Mr. Stettinius. Quite; except possibly in 10 per cen.t of the cases. 

Mr. Snell. And on the same basis that the British settle ? 

Mr. Stettinius. Yes. 

Secretary Baker. And in the same way with the French Govern- 
ment in most instances. 

Mr. Stettinius. In the case of the French, 50 per cent or over of 
our purchases were made from or through the French Government. 
All of our ordnance contracts are in very excellent shape and a very 
substantial amount of money has been saved for the United States 
Government. We have some other contracts that are in process of 
negotiation now. Generally speaking, and answering a question 
which I think you answered earlier, I might say that work was 
stopped, regardless of our rights, very early in the game — I think on 
November 14. We took the position that we were not in the slightest 
degree concerned in the labor position of France or England, and we 
w^ould not be responsible for any labor or material used in the manu- 
facture of stuff Ave did not want. 

Mr. Snell. Then practically all of those contracts have been al- 
ready stopped ? 

Mr. Stettinius. They have been stopped under assurances that 
we would dealy fairly and equitably. 

Mr. Snell. That would be expected, of course. 

Mr. Stettinius. Yes; that we would make them whole. Gener- 
erally speaking, we have said, " We will make you whole and protect 
you against any loss." In dealing with the French (rovernment avo 
have made the very positive statement that Ave understood clearly 
that Ave Avere getting all materials at cost, and therefore Ave would 
expect to fully reimburse them and protect them against any loss. 

Mr. Campbell. jMr. Stettinius, Avould you mind telling the com- 
mittee the method you expect to employ in arriving at an adjustment 
with an English contractor, for instance, who has. for the use of the 
United States, made some enlargements to his plant and Avas sud- 
denly stopped from producing the product contracted to be produced? 

Mr. Stettinius. We do not expect to deal Avith that situation at 
all, because there is none. Fortunately, in England there have been 
no orders that come within the class that Mr. Baker refers to; in fact, 



10 CERTAIN CONTRACTS MADE BY WAR DEPARTMENT. 

I think there is only one case, so far as I know, in which work had 
started without some kind of an order having been issued. What we 
require more than anything else on the other side is the right to 
make compromises. In other words, if we have given a man in 
Ahgiist or September, or at any other time, an order for $100,000 
worth of materials and none has been delivered, Ave want to have 
the right to give him $10,000 and call the Avhole thing off. We do 
not want to be forced to take delivery of something Ave do not want. 

The CiiAiRisrAN. That is really the paramount purpose of this legis- 
lation, as you have just expressed it, is it not? 

Mr. Stettinius. So far as the American Expeditionary Forces are 
concerned I Avould say so. What other point, Colonel, have you in 
mind to recognize the form of purchase ? 

Col. CuTCHEON. We Avant to recognize the contracts Avhich are 
Avholly informal, sometimes even to the extent of being merely re- 
quests upon Avhich Avork has been started and partially performed. 

Mr. Stettin lus. That is not true in England. 

Col. CuTCHEON. Not in England, but in France. i 

Mr. Stettinius. To a very limited extent in P^rance. 

Col. CuTCHEON. It is to be remembered, also, that our contracts j 
Avith GoA'ernments are merely informal, because, of coui'se. it has been ' 
impossible to make treaties or conventions. I 

Mr. Stettinius. They haA'e all been in Avriting, hoAvever. 

Col. Cittcheox. Yes; in one form or another. 

Mr. Snell. But they Avould not be considered formal contracts. , 

Col. CuTCHEON. They could not be, because there Avere no means of J 
making formal contracts except by treaty. s^ 

Mr. Stettinius. These Avere simply requests upon the French Gov- 
ernment to make deliveries to us of certain materials. 

Mr. Garrett. Perhaps I do not understand the situation exacth'', 
but I got the impression from Avhat Avas said a fcAv mements ago that 
our settlement of the contracts made abroad Avould be made through 
the respective Governments; in other Avords, the contracts made in 
England Avould be settled through the Bi-itish Government and not 
Avith the individual. 

Mr. Stettinius. That is true to a large extent; perhaps 90 per cent 
in England and probably 50 per cent in France. That ie not true 
in Spain and is not true in SAvitzerland or in Italy. 

Mr. Snell. HaA'e Ave very large contracts in those countries? 

Mr. Stettinius. No. 

Mr. Snell.^ They Avould be comparatively small as compared Avith 
England and France ? 

Mr. Stettinius. Oh, yes. 

Mr. Garrett. In so far as those contracts are to be settled through 
the respective Governments, there is no legislation necessary as to 
them, is there — if it is an agreement betAveen the tAvo Governments? 

Secretary Baker. But that is just Avhat it is not. It is not that; it 
is really an indirect agreement betAveen the War Department of the 
United States and A B, a manufacturer, negotiated through the 
British Government. 

Mr. Garrett. But if I understood correctly, it is being negotiated 
through the British Government, say, and the settlement will be 
made Avith the British Government. 



CERTAIN CONTRACTS MADE BY WAR DEPARTMENT. ' 11 

Secretary Baker. Well, it is entirely likely it will be through its 

agency ; but there is no treaty between teh United States and Great 

Britain, for instance, that Great Britain shall supply to the United 

States a certain number of motor cars, if that was what we were 

buying, or a certain number of pieces of artillery. We have simply 

] said to the British war office or to the British minister of munitions, 

i '" We would like to have so many pieces of such sized artillery," and 

Great Britain has sent out word either to her controlled factories or to 

her private factories or to her own factories, " Get ready to make that 

number of pieces of artillery for the United States." They have now 

bought the material, made the necessary forgings, gone somewhat 

forward with the matter, and are suddenly stopped. Now, there is 

no treaty between the United States and Great Britain covering that. 

i Mr. Garrett. That question will probably arise in the negotiation 

■ of the peace treaty, will it not ? 

Secretary Baker. I hardly think so. I think it will be treated as 
a pure business question, and what will ultimately happen will be 
that Great Britain will say to A B, the manufacturer, " Now, just 
how much have you put yourself out getting ready to do what we told 
you to do for the American Expeditionary Forces?" and then they 
J will say so many hundred thousand dollars or pounds, and the United 
I States will pay that money to A B direct, instead of paying it 
through the British Government. 

Mr. Garrett. And that will be done in any event, without any 
legislation? 

Secretary Baker. No ; that is covered, as I understand it, by the 
comptroller's prohibition. 

Col. CuTCHEON. May I say a word here? 

Secretary Baker. Yes. Gentlemen, this is Col. Cutcheon, who 
has been dealing with these matters on the other side. 

Col. CuTCHEON. If I may explain just one difference there, in 
Great Britain there are three classes of contracts. There is the con- 
tract made direct with the British Government, such as Mr. Stettinius 
made, and settled recently. That was a contract for artillery which 
the Government only could make and dispose of. It had sub'on- 
tractors, but it dealt with the subcontractors for itself and sold the 
artillery to us. Then there is a form of contract, which was made 
during the early part of the war and of which there are a great 
many examples, a contract which the Government placed for us, so 
to speak, as our representative, as a middleman. That is the form of 
contract which, Mr. Secretary, you had in your mind a moment ago. 
There are a great many of those. In those cases we did not deal, 
and never have dealt, with the contractor, but Ave might pay the con- 
tractor directly or we might pay him through the British Govern- 
ment. At one time we Avere paying the British Government for him. 
Then for a time aa^c paid him direct under the Governmenfs instruc- 
tions, and recently Ave returned to the principle of paying through 
the Government. Then, recently, there have been other contracts 
made Avith commercial houses by the British GoA-ernnient for us, but 
made in its own behalf and upon its own responsibility. Our rela- 
tions being directly with the Government, it is just as if they were 
the producers. Those three conditions exist in Great Britain, and 
have to be observed. In Great Britain thev have also manv termina- 



12 certaijst coxteacts made by war department. 

tioii clauses. They have certain termination clauses which are in- 
corporated in their contracts by the mere operation of order and 
regulation. They have other special termination clauses, and many 
of our contracts are subject to their termination clauses. Practically 
all contracts which are placed through the British Government are 
subject to some termination clause. 

In France, we have two classes of contracts 

Mr. Snell (interposing). Colonel, may I ask right there what 
is the general condition of that termination clause? 

Col. CuTCHEON. There is what is known as the war-break clause 
which is applied by the British Government in practically all cases 
in which they do not apply special termination clauses, and that pro 
vides for two weeks', notice, for manufacture during the two weeks 
for taking the product of the tAvo weeks, for the return to the British 
Government of everything which they may have furnished and the 
repayment to the contractor of whatever he may have paid the Brit- 
ish Governuient, and for the purchase by the British Government or 
the indemnification of the contractor for materials purchased outside 
and which have been rendered useless by the termination of the con- 
tract. In that case, tlie loss being measured by a resale or disposition 
of the article. 

Mr. Snell. All of those contracts would be terminated long before 
this time. 

Col. CuTCHFOx. No. sir; not all of them. Some of them have been 
terminated. Those Avhich fall under the operation of that particu- 
lar clause; yes. 

Mr. Snell. That is what I mean. 

Col. CuTCHEON. But there are a great many special termination 
clauses which are incornorated. particularly in important contracts. 
For example, in the artillery and the ammimition contracts there are 
almost invariably some special termination clause running from 
6 weeks to 12 months, depending upon the nature of the article 
which Avas the subject of the contract. When Mr. Stettinius nego- 
tiated the tentative settlement of the artillery contract, it was agreed 
as to munitions six weeks should be taken as the average termination 
clause, which, plus the date of delivery to France, made a three 
months' deliver v. 

In France Ave have, generallv speaking. tAvo classes of contracts, 
contracts Avith the French Government direct such as for artillery 
find munitions, and contracts Avith commercial houses which the 
French Government has had nothing: to do Avith except that it vises 
the transaction in^he sense of licensing it, A'iseing the price where a 
price has been agreed upon. In a great many cases, I should say in 
more than 90 per cent of our contracts, they are not contracts at all 
in the sense that Ave Avould use the Avord in this country or in any 
common-laAv country. They are mere orders, mere requests to pro- 
duce, and that is true of iiractically cA-erything pn.rchased bA' the 
French Government, and it is true. I should say. roughly speaking, of 
90 per cent of the contracts mnde Avith the French commercial houses: 
and if this ruling of Comptroller WarAvick is a sound ruling Avhich 
must be observed — and I sup]Dose it must be observed for the jDurpose 
of expedition Avhether it is sound or not — Ave need remedial legislation 
as to practically every obligation of the United States in France. 



CERTAIN CONTEACTS MADE BY WAR DEPARTMENT. 13 

Mr. Harrison. Is that ruling in writing? 

Col. CuTciiEON. Yes. 

Mr. Harrison. Mr. Chairman, may we not put that in the record? 

Mr. Dent. Mr. Chairman, may I suggest that the ruling is printed 
in the hearings before the Committee on Military Affairs. 

Col. CuTCHEON. There is just one other consideration I was going 
to suggest, if I may, and that is in France the French Government 
does not treat its own nationals in the way we treat ours, and that 
the French Government deals with every man, whether he is a 
citizen of France or not, upon a purely business basis ; his patriotism 
is not appealed to, and he is not treated arbitrarily because he is a 
national of France. Where a contract is canceled arbitrarily, com- 
pensation is made to him for his loss of profits. We would place 
ourselves in the position of practically repudiating our obligations 
in Frence if we were to suggest to the French national that he 
should throw away all his profits without some consideration. 

Mr. Campbell. Are you able to state the number of informal 
contracts in France and England under which materials have been 
furnished to the Government of the United States? 

Col. CuTCHEON. If you leave out construction contracts, I think 
you may say that they are all informal. 

Mr. Harrison. What does it amount to ? 

Mr. Campbell. I mean contracts that have not been executed by 
the parties formally. 

Col. CuTCHEON. You mean in which there are no writings, there 
are no formal contracts in the sense the comptroller w^oulcl use the 
phrase except in construction matters. There may be a very few 
exceptions. There are only a few cases in the purchase orders, which 
are written, which 

Mr. Campbell (interposing). What I want to get at is the number 
of the contracts and the amount involved by the contracts. 

Col. CuTCHEON. Oh, they would run into the thousands; I can 
only put it in that way. It would be safe to say that a minimum in 
France would be 2,000,000,000 francs of contract obligations upon 
which, of course, only a portion of that is an absolute debt. 

Mr. Stettinius. But purchase orders have been placed. 

Mr. Campbell. Purchase orders have been placed under probably 
1,000 or more contracts ? 

Col. Cutcheon. Oh, many thousand. 

Mr. Stettinius. But the number of orders that have been in- 
formally placed without any purchase orders is negligible. 

Secretary Baker. In other words, there is written evidence of the 
terms of every one of these understandings. 

Col. Cutcheon. That would be true except with the Government. 

Mr. Campbell. In what way will a representative of the United 
States be able to protect the United States in reaching an adjustment 
of these contracts? . 

Col. Cutcheon. In two ways, sir. First, we have in every case, 
with the exception of a negligible number of cases, a written order, 
which, as between a commercial house in this country and another 
commercial house in another country, would be considered a contract. 
It is not a contract simply on account of the technical provisions of 
the statute of the United States Avhich the comptroller seems to be 



14 CERTAIN CONTRACTS MADE BY WAR DEPARTMENT. 

of the opinion applies in France. Personally, I think he is wrong in 
that. A reference to that purchase order which, like in the case of 
a commercial house, almost invariabl}^ states the subject matter, the 
date of deliver}^, the unit price, and then the aggregate price and the 
place and method of payment, will give you the complete data with 
respect to the order and the payment to be made when it is supple- 
mented by a record of how much has been delivered, and what the 
process of the manufacture is, and what jDrogress has been made, etc. 
With the French Government that is not quite true, but of course 
with the French Government you are dealing with a diplomatic situa- 
tion anyway, and in a broad sense you can not make a binding con- 
tract. With the French Government many of our orders are simply 
for so much of a certain thing, for instance, shells, to be delivered as 
quickly as possible, the price not being stated, but it being under- 
stood always that the price should be cost in the sense that there 
shall be no profit to the Government. 

Now, in the second place you have the assurance that we will not 
be obligated by reason of either, that nobody can compel us to pay 
anything on any of these contracts, and that in the last analysis we 
adjust the settlement to suit ourselves; that is to say, if we do not 
think the debt is justly due we can not be compelled to pay it. There 
is no process which runs against the United States in France. 

Mr. Campbell. Secretary Baker spoke a moment ago of materials 
amounting to salvage in the factories upon which an adjustment will 
have to be made. In Avhat way will that adjustment be reached in 
France ? 

Col. CuTciiEOX. Mr. Stettinius can answer that question better 
than I can. My connection with these things has l)een advisory, 
and I have not dealt with the business side of it. The practical situ- 
ation in one service with which I am familiar is this : A board of officers 
has taken up the question with the French service of what can w^ell 
be delivered to us, what we can wisely accept and what should be 
rejected, and what should be allowed for it, giving us the option to 
take a thing which would seem to be needed or reject it, as we see fit, 
and receive the salvage value for it. It would then come back to 
the head of the service to determine whether the article itself should 
be taken or rejected and the salvage value accepted, and in an im- 
portant case they Avould almost invariably cable to the War Depart- 
ment here for instructions or advice, as the Secretary might determine 
to give it. 

Mr. Campbell. Is it intended that these adjustments shall be made 
with the Governments of foreign countries and with the contractors 
through a commission or through representatives of the AVar Depart- 
ment ? 

Col. CuTCHEON. I Avill have to refer you to the Secretary or to Mr. 
Stettinius to answer that. 

Mr. Campbell. What is the plan of making adjustments under 
these contracts? 

Mr. Stettinius. All purchase orders placed with the French Gov- 
ernment will be adjusted directly with the French Government. 

Secretary Baker. But Mr. Campbell wants to know, Mr. Stettinius, 
who in France will represent the Government of the United States 
in negotiating these settlements. 



CERTAIiSr CONTRACTS MADE BY WAR DEPARTMENT. 15 

Mr, Stettixius. Gen. Harbord is the commanding general of the 
service of supply and will be in general charge, working through the 
chiefs of the respective bureaus. 

Secretary Baker. If it is an ordnance contract, for instance, it 
w^ould be directly under Gen. Eice, who is the chief ordnance officer 
there. They are advised by boards of officers who are experts, 
selected because of their expert character; and in addition to that 
there are a number of very eminent business men associated wath the 
American Expeditionary Force who are general advisers in all these 
matters. Mr. Stettinius has been over there for a good many months 
representing the War Department as its si)ecial and direct representa- 
tive in doing these things and has personally negotiated and prac- 
tically settled contracts amounting to very, very many tens of millions 
of dollars with both the French and the British Governments on 
terms that seem to me very favorable. 

Mr. Snell. As I understand the whole situation, if this was simply 
a matter between individuals you have all the data necessary and 
could settle it up very quicldy. 

Col. CuTCHEON. Yes, sir. 

Mr. Snell. And you want this legislation passed so you can act on 
the part of the Government the same as if it was an individual? 

Mr. Stettinius. Yes; and merely, as I understand it, on account of 
the ruling of the comptroller. 

Mr. Snell. You have all the data and everything necessary and 
can go ahead and settle it up very quickly ? 

Mr. Stettinius. Yes; I do not think there is any difficulty about it 
at all. 

Mr. Snell. Except the comptroller says you can not do it as a 
representative of the Government. 

Mr. Stettinius. Of course, the main thing we want to be in posi- 
tion in France to do is to make suitable reimbursements to the con- 
tractors in lieu of being required to take something we do not want. 
We can let the purchase order stand if the comptroller maintains his 
attitude. 

Mr. Snell. And it is better to pay something and be rid of the 
whole matter than to have to take something that we do not want? 

Mr. Stettinius. Certainly. For instance, in aircraft there have 
been a vast number of orders placed for small things. I think in 
the case of England there have been several hundred orders, and 
wdiile the aggregate is relatively small, they call for special things for 
Avhich we have no earthly use. 

Mr. Snell. And it would be an absolute loss to have to take them? 

Mr. Stettinius. Yes. A general ruling has been made that the 
contractors will settle for 1"2| per cent of the contract. That was the 
arrangement that the English Avorked out in respect to their ow^n 
contractors, and now they have said, " You can come in on this thing 
if you want to," and, of course, Ave Avant to. 

The CHAiRaiAN. Has it been possible to make any estimate of the 
saving to the Government in case this legislation is agreed to? 

Mr. Stettinius. No, not yet; but I Avould not have any hesitation 
at all in telling you that it Avould run into the tens of millions of 
dollars. 



16 CEETAIN COKTEACTS MADE BY WAR DEPARTMENT. 

Secretary Baker. The illustration Mr. Stettinius has just given, it 
seems to me, is a capital one, and that is that the contractors are to 
be paid at the rate of 12^ per cent of the total contract. So, if you 
had a contract for $1,000^000 you would pay $120,000 and be quit of 
the entire transaction. 

Mr. Snell. Anybody Avould think that that was a fairly decent 
settlement, if you only had to pay 12^ per cent. 

Mr. Sfettinius. That is the basis on which the British as Avell as 
the French are handling their contracts. 

Mr. Snell. If you get out of the contracts in that way, it would 
seem to me that that was a good business proposition. 

Mr. Garkett. You would make no distinction between the con- 
tracts abroad and the contracts here at home? 

Mr. Stettinius. I Avas concerned in the contracts abroad. 

Secretary Baker. I think there ought to be no distinction made, 
Mr. Garrett. We are in exactly the same situation here in the United 
States. 

Mr. Snell. The business conditions here might force you to make 
some difference in settling the contracts. For instance, we are extend- 
ing some contracts here, as I understand it, to take care of the labor 
situation. 

Secretary Baker. Hardly that. 

]\Ir. Skell. While, as Mr. Stettinius has said, v,e are not interested 
in the labor situation in foreign countries. 

Secretary Baker. We have not quite done that in the United States. 
We have made a tapering-off period in order not to throw everj'^thing 
into the air at one time. 

Mr. SxELL. That is what I say. You have done that to a certain 
extent, while, as Mr. Stettinius has said, they immediately canceled 
contracts over there whether they had any right to do so or not, 
because they were not interested in the labor situation. 

Col. CuTCHEON. But in those cases the French Government went 
on at all times. 

Mr. Garrett. May I suggest this thought, Mr. Secretary? Of 
course, theoretically, all people everyAvhere have dealt Avith the 
Government Avith a notice of the limitations of laAV. I say, theo- 
retically, because I take it that that is an absolute statement of fact, 
but there might be, it seems to me, more reason in the case of foreign 
contracts Avhere, although they dealt theoretically with the notice of 
the limitations prescribed by the statutes of the United States, yet 
the phj^sical situation is such that it might put them on an entirely 
different plane from the situation of contractors here in the United 
States. 

Secretary Baker. Mr. Garrett. I do not think that. I do not think 
the Government of the United States ought to pay a cent to a 
foreign contractor or to an American contractor that is not just; and 
I mean just in the sense of equity, but I think it ought to pay eA^ery 
cent that is equitably due to either. 

Mr. Garrett. Absolutely. 

Secretary Baker. And Avhen a'Ou are dealing with the pressure of 
Avar necessity 

Mr. Garrett (interposing). I think there will be absolutely no 
disagreement in the mind of any honest man upon that principle 
which you haA^e just laid down. 



CERTAIN CONTRACTS MADE BY WAR DEPARTMENT. 17 

Secretary Baker. So far as your other suggestion is concerned 
about knowledge of the hiw, knowledge of the law is an imputed 
virtue that does not often exist. 

Mr. Snell. Does the average contractor know anything about 
such statutes, or any of these conditions ? 

Secretary Baker. No ; they do not ; and, as a matter of fact, they 
think of the war powers of the Government, and the Government 
officer comes along and says, " I Avant your factory to do this thing," 
and his reflection is, " If I do not do this they will take my factory 
and do it themselves." That is the power which the War Depart- 
ment has had. Therefore, they have not stopped on account of the 
legal character of the persons they were dealing with, or the formali- 
ties involved, but have jumped in and gone ahead. 

Col. CuTciiEON. The law only imputes knowledge of the laAv of the 
land, and not knowledge of the law of another land. 

Secretary Baker. Yes; of course, the French have an additional 
reason for escaping the imputation. 

Mr. Snell. But the average contractor did not pay any attention 
to things of that sort. 

Col. Cutcheox. If they had, you would never have gotten any 
deliveries. 

The Chairman. Mr. Secretary, we would be obliged to you if 
you would indicate any of the other gentlemen whom you would 
like for us to hear. 

Secretary Baker. Mr. Dorr, the assistant director of munitions, 
and Mr. Crowell, the Assistant Secretary of War, are here, and I 
should be very happy if you would now hear Mr. Crowell. 

Mr. Crowell. Mr. Chairman, I would like to mention one point, 
and that is what will happen if we do not do this. The amount of 
the contracts that we know about is $1,600,000,000. These con- 
tractors have patriotically gone ahead and they have their working 
capital tied up in these contracts, and the opinion of most of the 
men who have gone into this matter is that a resumption of business 
in this country is not possible until these matters are settled. 

Mr. Rodenberg. That is the point I wanted you to bring out. 

Mr. Crowell. That is the vital thing to-day, and we are all 
interested in settling these matters in a speedy and not a slow way. 
We are pouring back men out of war industries and out of the 
Army, having demobilized over half a million men from the Army 
to date. Men from construction Army work have been poured back 
into industry, over 100,000 of them. It is impossible to tell how 
many have been discharged from war industries, because most of 
those industries have been cut short and comparatively few of them 
are running to-day. The tapering off has applied only to certain 
articles. So that we are in the position of having the large number 
of men looking for work constantly and rapidly increasing, with 
no work for them unless we can relieve the manufacturers from, 
this burden under which they are placed to-day, bj^ which their 
working capital is tied up and they are not able to resume work, and 
that applies to some of the large concerns as well as the small ones. 

Mr, Rodenberg. Is it not true that unless you have authority to 
make this adjustment, some of these contractors are really facing 
bankruptcy ? 

97899— IS 2 



18 CERTAIN CONTRACTS MADE BY WAR DEPARTMENT. 

Mr. Crowell. "VYe have had telegrams from all over the country 
urging that unless this is done within a week we will have firms' 
going into bankruptcy, and others state two weeks. 

Mr. Harrisox. I notice you propose by this bill that 10 days' no- 
tice to the clerk of the House must be published. 

Secretary Baker. That is an amendment made in the House com- 
mittee to the bill, which we regret very much. 

Mr. Crowell. I think that a plan of settlement being adopted 
would act as a great stabilizer to industry. These men, most of them, 
have borrowed money, and the banks are looking very skeptically at 
these contracts for the reason that the question is not settled. I think 
a settlement would go a long way toward relieving the difficulties that 
the business men are under. 

Mr. Campbell. Mr. Crowell, are these contractors who have dealt 
with the Government on these matters really as hard up as they 
claim, or is it just a claim they are niaking now to force the Govern- 
ment into an adjustment of these matters at an early time ^ 

Mr. Crowell. There is no doubt in my mind that they are in the 
position that I have stated, and in a great many cases I know, because 
we have accountants in their work, in many cases we have advanced 
money and have full knowledge of their financial condition. I 
wouldn't hesitate to make the statement that the statement I have 
made is true to my knowledge. 

Mr. Caimpbell. We have heard much of profiteers and excess 
profits and Avar profits. I take it that these profits were made by con- 
tractors with the Government, such as you now speak of. 

Mr. Crowell. I think in a general way the more patriotic of our 
contractors are the very fellows who have gone ahead in this infor- 
mal way and not waited for a formal contract approved' by their 
attorneys. 

Mr. Snell. It would apply to small contractors more than large 
contractors, wouldn't it ? 

Mr. Crowell. Thousands of small ones. 

Mr. Snell. That need the money, I mean. 

Mr. Crowell. Yes, sir. 

Mr. Campbell. What per cent of contracts made by the department 
are affected by this legislation ? 

Mr. Crowell. At least 25 per cent. 

The Chairman. In your opinion this legislation is necessary in 
order to facilitate these industries to get back on a peace basis? 

Mr. Crowell. Yes, sir. We have evidence of that every day, Mr. 
Chairman, in the labor reports we get. The number of cities showing 
a surplus of labor is increasing every day and those men can not get 
to work until the employers of labor can get their nioney out and 
start on a commercial basis, and to-day they are not able to do so. 

Mr. Harrison. Is there anything else in this bill that the War De- 
partment objects to? 

Mr. Crowell. I guess there is, the 10-day question. I will ask Mr. 
Dorr to answer that question. 

Mr. Dorr. There is one or two matters which are possibly incom- 
plete in view of the situation abroad. There is one very broad thing 
in the bill which seems to us to occasion difficulties. On page 3, lines 
18 to 25, there is a proviso, " That ]3ayment under such agreement 



CERTAIN CONTBACTS MADE BY WAR DEPARTMENT. 19 

shall not exceed the fair value of the property transferred or deliv- 
ered and accepted by the United States as determined by the Secre- 
tary of War, and where no property has been transferred, delivered^ 
or accepted payment shall not be in excess of the actual cost incurred 
in preparation for performance, as such cost is determined by said 
Secretary." As I read that proviso it would permit payment not in 
excess of the fair value of the property where property had actually 
been delivered. That is, where there was actual delivery. On the 
other hand, it would also permit reimbursement for performance 
where the work had been stopped short of actual delivery, and there 
had been no actual deliveries whatsoever, and in the third situation 
where there had been deliveries and there were still further prepara- 
tions and further performances, and still there is that situation to 
provide for, and we have suggested an amendment to the Military 
Aifairs Committee to cover that ground where, although there have 
been some deliveries, there is still further expense in further prepara- 
tion for further performance, and that further performance has been 
checked by the signing of the armistice. I might say this proviso 
was taken up by the Military Affairs Committee by a bill framed by 
the Comptroller and by us submitted to the Military Affairs Com- 
mittee. 

The Chairman. This committee would have to depend upon the 
Military Affairs Committee of the House to make that amendment. 
We are merely proposing to give it a preferential right on the 
calendar. 

Mr. Dorr. And again it might be necessary, as Mr. Stettinius has 
pointed out. to insert Governments as well as civilians, and possibly 
a proviso would be necessary permitting the adjustment of the pro- 
spective profits in the instances abroad on which Mr. Stettinius and 
Col. Cutcheon have pointed out. 

The Chairman. Are there any further observations 3^011 care to 
make, Mr. Crowell? 

Mr. Crowell. I think not, except to say in this country we are 
not allowing prospective profits in the settlements. 

The Chairman. We would be glad to hear from Mr. Dorr if he 
cares to be heard. 

Mr. Dorr. I don't think there is anything I can add. T\Ir. Chairman. 
It is all before the committee. 

The Chairman. I think if there are no other gentlemen from the 
War Department that care to be heard the committee would be very 
glad to hear from Mr, Sherley. 

STATEMENT OF HON. SWAGAR SHERLEY, MEMBER OF CONGRESS 
FROM KENTUCKY AND CHAIRMAN OF THE COMMITTEE ON 
APPROPRIATIONS OF THE HOUSE OF REPRESENTATIVES. 

Mr. Sherley. I don't know that I care to talk particularly about 
the bill, which I haven't examined with enough care to come to a final 
conclusion, though later on I will make a suggestion as to legislation 
I think ought to be had, whether carried as part of this bill or not. 
But I do want to say that I haAe been engaged with my committee 
for nearly a month past trying to check up with the moneys now 
with these various departments unexpended and the liabilities that 



20 CEETAIN CONTRACTS MADE BY WAR DEPARTMENT. 

exist against those moneys in order to ascertain what proportion of 
moneys heretofore appropriated can be returned into the Treasury. 
That hearing develops several situations which make the work of 
the committee exceedingly difficult and necessarily, in some degi'ee, 
unsatisfactory, and yet Avhich perhaps can not be avoided. 

I find that there is no accurate knowledge on the part of the offices 
here of the expenditures abroad. They know what moneys have been 
placed to the credits of various offices abroad, but the extent to which 
those moneys have been actually disbursed or the liabilities against 
them and other Treasury funds that have been created they are not 
yet in a position to tell us. I mention that not in a way of criticism, 
because there are difficulties that those who know most about the 
work will appreciate most, and only those who are ignorant of the 
problems will dismiss, but it is a fact which makes difficult of ascer- 
tainment of governmental liabilities involved in France and England. 
Then in America there are unquestionably a large number of offices of 
the Government that do not have the status of legal obligations grow- 
ing out of binding contracts. Doubtless that has all been gone into. 
The Ordnance Department, in pursuance to their final sheets, have 
presented very large sums under the head of reservations which I 
think grew out of this situation, a project just about determined upon 
as necessary to be undertaken, steps would be taken to carr}' it out 
and various individuals would incur liabilities on their own part in 
furtherance of this project, but it would not always have reached the 
]^oint of the final binding contract. It constitutes a moral obligation 
on the part of the Government as clear as if the matter had reached 
final signature and a legal contract. Then there have been a great 
many instances in which officers ha^'e undertaken to bind the Govern- 
ment in the name of a superior officer. Under the decision of the 
comptroller, with which you are familiar, it has been held that 
IS not a binding contract. It is a contract any self-respecting govern- 
ment would respect, and I have no doubt this one will respect, so it 
is perfectly patent that legislation is in order to put men who ha\'e 
in good faith incurred obligations and to whom the Government in 
good faith owes money in a position where they have a legal status. 

But I think there is an economic and a governmental phase of this 
matter that is very much bigger than the purely technical one. To 
my mind, if you delay over a period of months, and perhaps of years, 
the adjustment of the contracts and settlements you will not adjust 
them as reasonably from the Government's standpoint as you can do 
it now, and you will entail hardships upon individuals that would be 
unwarranted. If we are going to go back to the old condition, to 
have claims presented either through the Court of Claims and 
through the Committee on Claims and Congress subsequently making 
appropriations our great, great grandchildren will never see the ad- 
justment of a great proportion of these matters, and many of the 
men wdio have the knowledge to protect the Government are rapidly 
leaving the Government. Their knowledge will not be anything like 
as good to the Government GO days after they leave as to-day, so that 
from every standpoint it is highly desirable that there should be 
adjustment. It is highly desirable from a standpoint of Treasury 
financing. If the Committee on Appropriations had any real knowl- 
edge as to the money that is necessary to liquidate the outstanding 
obligations, it could cover into the Treasurv much larger sums than 



( 



CERTAIX CONTRACTS MADE BY WAR DEPARTMENT. 21 

it will cover, and the matter of financing that we will still have to do 
in the way of taxes and loans would be made more certain. 

I think there ought to be legislation which provides for speedy ad- 
justment of that part of the contracts or agreements that exist be- 
tween the Government and the third party that may be the subject 
of dispute. There are unquestionably coming up questions where 
hundreds of instances in which the Government on one hand and the 
private party on another wdll get to an agreement to within $100,000 
outstanding, the Govermnent on one hand contending that it shouldn't 
pay that much or the contractor or third party contending it should. 
If legislation were had permitting the Government and the con- 
tractors to refer to arbitration those disputed matters w^ith the de- 
cision of the arbitrators to be final I believe that every business man 
in the country, largely speaking, would gladly avail himself of the 
opportunity of a speedy adjustment. Under the law, I take it, you 
can not deny to a man his rights to a day in court when he has a 
contract, but you don't need to bother with that situation as a prac- 
tical thing, because of the desire business men will have for a speedy 
adjustment, because to-day there isn't a great producing exchange, 
a great board of trade, that doesn't weekly settle amounts running 
into the thousands of dollars with a few hours of conference before 
arbitrators who have the power to make a final binding award, and 
if some such provision as that was enacted in addition to this pro- 
posal, which I take it is a proposal to legalize agreement and to au- 
thorize complete settlement, a^ou would then provide a machinery for 
the rapid adjustment of these matters. 

Now, it is abosultely impossible for Congress, or any committee of 
Congress, to undertake to make an examination into contracts in 
order to determine what would or would not be an equitable settle- 
ment. In the first place they could not do it, in two years, if they did 
nothing else but read the contracts — the average man has no concep- 
tion of the magnitude of the Government's undertakings notwith- 
standing we constantly talk about them. Working every day, for 
Aveeks, I have been unable to touch only in a superficial way some 
of the big oustanding things in connection with governmental liabili- 
ties. To undertake to go into the details of it is impossible. It seems 
to me the Government is forced to one of two alternatives, either it 
must trust the agencies that it trusted to spend the money, that it 
A'oted millions and millions of dollars to — by trusting, I don't mean 
Avithout proper safeguards, but in any event you have either got to 
trust those agencies pr you have got to throAv the whole thing back 
into the slow process of court trials or congressional claims. If you 
ever throw it into the courts, generally speaking, or into congres- 
sional adjustments, there is not a man here living Avho will be living 
Avhen a third of these claims will be liquidated or adjusted. 

Mr. Harrison. What was the policy folloAved in the Civil War? 
Mr. Sherley. I haA^en't undertaken to find out, but we knoAV some- 
thing about the lack of some policy because we see that to-day. 

Mr. Garrett. Well, the history of that is not a very delightful 
chapter in the history of our countrv\ Various, methods were em- 
ployed. 

Mr. Sherley. I have said about all that I care to say. It is also 
true that there are a great many instances in which you will very 
seriously curtail the industrial activities of America bv a failure to 



22 OEETAIN CONTRACTS MADE BY WAR DEPARTMENT. 

properly liquidate matters and that doesn't necessarily mean that 
men are bankrupt who are affected by a delay. All of us have learned 
to discount the zeal of men for other people and their own lamenta- 
tions concerning themselves where the Government is concerned, and 
yet it necessarily follows that the strongest concern that has turned 
into practically a governmental activity, so that it is doing from 
80 to 90 and 100 per cent of Government work, has so tied its work- 
ing capital, even assuming that it did. as they usually did, have to 
come to the Government for capital. It is so tied up with Govern- 
ment work that the taking up of new business and the resumption 
of the old business of the company is impossible unless it is possible 
for it to get freed the money it has tied up wdth working material^ 
etc., and any man that has any proper consideration must see that 
there must be a liquidation of a large part of these contracts in order 
for these firms to go along with their ordinary business. 

And there is still another thing; all the world is talking abovit 
high prices and doing very little to get rid of them. We will never 
get down to low prices until we get rid of the constant inflation of 
credits, whether they are governmental or private. If you force 
men who have their working capital tied up in Government work to 
go out into the markets to borrow further in order to carr}^ on their 
industrial activities while they are waiting their adjustment of the 
Government activities, you, just to that extent, further inflate the 
credit of the Government and will keep this country unstable along 
w^ith others, and I can't imagine nothing more important than we 
should clean up Government activities, bringing the Government 
back to its own business and the people to theirs. 

The Chairman. Mr. Dent, the committee would be glad to hear 
anything you may have to say. 

STATEMENT OF HON. H. S. BENT. A REPRESENTATIVE FROM 
ALABAMA AND CHAIRMAN OF THE COMMITTEE ON MILITARY 
AFFAIRS OF THE HOUSE OF REPRESENTATIVES. 

Mr. Dent. Mr. Chairman, I don't think there can be anj^ two sides 
to the proposition that the Government of the United States ought 
to be at least authorized and its agents permitted to carry out an 
honest obligation made under the authorit}- of those who were acting 
for the Govermnent during this emergency. As I say, I don't think 
there can be tw^o sides to that proposition. There may be some 
difference as to the form which it should take. 

The Military Affairs Committee of the House gave very careful 
consideration to this matter. "We had full and complete hearings 
on it and we reached a unanimous conclusion that there should be 
some legislation. We agreed upon a form. We undertook to put 
provisions around the authorities that would protect the Govern- 
ment from graft or corruption. There are some provisions or some 
language, perhaps, that might be struck out and amendments, per- 
haps, that should be made on the floor of the House as probably the 
last provision, which requires that the names of such contractors and 
the amount of such partial or final settlement filed with the Clerk 
of the House for the information of the House and Senate in the 
Congressional Record or in the Official Bulletin or as a public docu- 
ment 10 clays before confirmation and payment is authorized upon 



I 



CBETAIN CONTRACTS MADE BY WAR DEPARTMENT. 23 

such contracts. I opposed that because I considered it a handicap 
in handling the adjustment of these claims. 

I said the committee unanimously reported the bill ; in order to 
be perfectly frank, one member of the committee who has recently 
been placed on the committee stated he hadn't had time to make an 
investigation for himself and reserved his decision but did not vote 
against the report of the bill. 

I think that is all involved in this matter, except I may conclude 
with this statement, which I may have frequently made and which 
was stated in different language by Mr. Snell a few moments ago, 
that this bill does nothing more nor less than to authorize the Gov- 
ernment of the United States to discharge obligations which, had 
the obligations taken place under similar circumstances between 
private individuals, would be enforced by any court of justice in 
the land. 

Mr. Harrisox. Mr. Dent, before you sit clown, the resolution for 
a rule has not been introduced yet ? 

Mr. Dent. Yes: I introduced it. It is in the general form. Au- 
thorizes amendments and provides for a vote after two hours of 
debate. 

The Chairman. Mr. Kahn, the committee would be glad to hear 
from you. 

STATEMENT OF HON. JULIUS KAHN, MEMBER OF CONGRESS FROM 
THE STATE OF CALIFORNIA AND MEMBER OF THE COMMIT- 
TEE ON MILITARY AFFAIRS OF THE HOUSE OF REPRESENTA- 
TIVES. 

Mr. Kahn, There is nothing that I can add to what has already 
been said. Of course, if these agreements had been executed in 
proper form there would be no need for this legislation. Because 
of the fact that they are purely informal, they can not be dealt with 
unless the legislation is passed, and I fully concur in what has been 
said here, that this matter ought to be done very expeditiously. 

Mr. Snell. I understood that this legislation was needed on ac- 
count of formal contracts to adjust them. 

Mr. Kahn. No; there are no formal contracts, I understand, con- 
templated by this legislation. I understand from the War Depart- 
ment that formal contracts properly executed are in process of adjust- 
ment at this time. That there are various boards appointed by the 
department for the purpose of taking up the claims of those who 
entered into those contracts, and they are being, day after day, 
compromised. 

Mr. Snell. The provision in this bill seems to be for a readjustment 
of formal contracts. 

Mr. Kahn. Not the formal contracts. There are no contracts con- 
templated by the bill. 

Mr. Snell. It doesn't provide for the readjustment of those con- 
tracts ? 

Mr. Kahn. No. 

Mr. Snell. I don't mean to say that the power ought not to be 
given; do you mean executed contracts? 

Mr. Kahn. I mean properly executed and legally executed, that 
were signed and delivered, etc. 



24 



CERTAIN CONTEACTS MADE BY WAR DEPARTMENT. 



Mr, Garrett, The very first line beginning on page 3 as reported. 
" That the Secretary of War be and he is hereby anthorized to ad- 
just, pay, or discharge any agreement, express or implied," I take it 
that that word *' express '' means 

Mr. Kahn, I take it it means that if agreement had been entered 
into by private individuals they would be construed by the courts as 
contracts but by reason of the fact that the Government requires 
specific things to be done in order to make a valid contract, the men 
who went ahead without having those specific things done are now in 
the attitude where they can not go to court. 

Mr, Garrett. I don't undertake to say that the Secretary of War 
ought not to have this power. I am inclined to think he should, but 
I don't think we ought to have any misunderstanding about it. 

Mr. Kahn, Line IT, '" and which agreement as not executed in the 
manner prescribed by law," 

Secretary Baker, As we understand it, Mr, Chairman, the comp- 
troller's ruling does not affect various contracts that are executed 
in accordance with all the requirements of the law ; those we can ad- 
just and those we are adjusting noAv so that we need no additional 
power on that subject. The language on line 17 referred to by Mr. 
Garrett covers all the matters, 

Mr. Snell. So this refers to no contracts that have been signed? 

Secretary Baker, No. 

Mr, Kahn, The War Department is appointing one board and 
sending to another board and it is gone over again and then finally 
referred to a third board in the War Department here for a final re 
view so that the Government's rights are being safeguarded by the 
department as well as they can be. 

The Chairjniax, Mr. Secretary and gentlemen, we thank you for 
your presence here and the statements you have made. Is anyone 
here who wishes to be heard in opposition to this resolution ? 

Mr. Dent, Not that I know of; nobody objected on the floor be- 
cause I never gave them an opportunity to object, but Mr. Doolittle 
of Kansas notified me he was going to object. 

Thereupon at 12 o'clock the committee adjourned. 



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